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CAMBRIDGE – Europe is in constitutional crisis. No one seems to
have the power to impose a sensible resolution of its peripheral
countries’ debt crisis.

Instead of restructuring the manifestly unsustainable debt
burdens of Portugal, Ireland, and Greece (the PIGs), politicians
and policymakers are pushing for ever-larger bailout packages
with ever-less realistic austerity conditions.

Unfortunately, they are not just “kicking the can down the road,”
but pushing a snowball down a mountain.

True, for the moment, the problem is still economically
manageable. Eurozone growth is respectable, and the PIGs account
for only 6% of the eurozone’s GDP. But by stubbornly arguing that
that these countries are facing a liquidity crisis, rather than a
solvency problem, euro officials are putting the entire system at
risk. Major eurozone economies like Spain and Italy have huge
debt problems of their own, especially given anemic growth and a
manifest lack of competitiveness. The last thing they need is for
people to be led to believe that an implicit transfer union is
already in place, and that reform and economic restructuring can
wait.

European Union officials argue that it would be catastrophic to
restructure any member’s debts proactively. It is certainly the
case that contagion will rage after any Greek restructuring. It
will stop spreading only when Germany constructs a firm and
credible firewall, presumably around Spanish and Italian
central-government debt. This is exactly the kind of hardheaded
solution that one would see in a truly integrated currency area.
So, why do Europe’s leaders find this intermediate solution so
unimaginable?

Perhaps it is because they believe they do not have the
governance mechanisms in place to make tough decisions, to pick
winners and losers. The European Union’s weak, fractured
institutions dispose of less than 2% of eurozone GDP in tax
revenues. Any kind of bold decision essentially requires
unanimity. It is all for one and one for all, regardless of size,
debt position, and accountability. There is no point is drawing
up a Plan B if there is no authority or capacity to execute it.

Might Europe get lucky? Is there any chance that the snowball of
debt, dysfunction, and doubt will fall apart harmlessly before it
gathers more force?

Amidst so much uncertainty, anything is possible. If eurozone
growth wildly outperforms expectations in the next few years,
banks’ balance sheets would strengthen and German taxpayers’
pockets would deepen. The peripheral countries might just
experience enough growth to sustain their ambitious austerity
commitments.

Today’s strategy, however, is far more likely to lead to blowup
and disorderly restructuring. Why should the Greek people (not to
mention the Irish and the Portuguese) accept years of austerity
and slow growth for the sake of propping up the French and German
banking systems, unless they are given huge bribes to do so? As
Stanford professor Jeremy Bulow and I showed in our work on
sovereign debt in the 1980’s, countries rarely can be squeezed
into making net payments (payments minus new loans) to foreigners
of more than a few percent for a few years. The current
EU/International Monetary Fund strategy calls for a decade or two
of such payments. It has to, lest the German taxpayer revolt at
being asked to pay for Europe in perpetuity.

Perhaps this time is different. Perhaps the allure of belonging
to a growing reserve currency will make sustained recession and
austerity feasible in ways that have seldom been seen
historically. I doubt it.

True, against all odds and historical logic, Europe seems poised
to maintain the leadership of the IMF. Remarkably, in their
resignation to the apparently inevitable choice for the top
position, emerging-market leaders do not seem to realize that
they should still challenge the United States’ prerogative of
appointing the Fund’s extremely powerful number-two official. The
IMF has already been extraordinarily generous to the PIGs. Once
the new bailout-friendly team is ensconced, we can only expect
more generosity, regardless of whether these countries adhere to
their programs.

Unfortunately, an ultra-soft IMF is the last thing Europe needs
right now. With its constitutional crisis, we have reached
exactly the moment when the IMF needs to help the eurozone make
the tough decisions that it cannot make on its own. The Fund
needs to create programs for Portugal, Ireland, and Greece that
restore competitiveness and trim debt, and that offer them
realistic hope of a return to economic growth. The IMF needs to
prevent Europeans from allowing their constitutional paralysis to
turn the eurozone’s debt snowball into a global avalanche.

Absent the IMF, the one institution that might be able to take
action is the fiercely independent European Central Bank. But if
the ECB takes over entirely the role of “lender of last resort,”
it will ultimately become insolvent itself. This is no way to
secure the future of the single currency.

The endgame to any crisis is difficult to predict. Perhaps a
wholesale collapse of the euro exchange rate will be enough,
triggering an export boom. Perhaps Europe will just boom anyway.
But it is hard to see how the single currency can survive much
longer without a decisive move towards a far stronger fiscal
union.

Kenneth Rogoff is Professor of Economics and Public Policy at
Harvard University, and was formerly chief economist at the
IMF.